Rate cut stirs new fears of inflation in Gulf

The UAE Central Bank's decision to cut the interest rate on certificates of deposit by 50 basis points to three per cent, mirroring a similar move by the US Federal Reserve, stirred worries of soaring inflation in this country on Thursday.

The half per cent rate cut was followed by other Gulf oil producers who yesterday lowered deposit rates to ease pressure on their dollar-pegged currencies and left lending rates unchanged to avoid stoking near-record inflation.

"The repurchase rate is effectively the key interest rate in the UAE according to which we lend to local banks," Mohammad Abdullah, assistant director of the central bank's treasury department, said.

With a lower cost of borrowing accompanied by high economic growth and strong consumer purchasing power, the prices of goods and services tend to spiral.

Imported inflation is yet another concern as imports in currencies other than the US dollar become more expensive.

Shift in emphasis

Adding to the woes is the weakening US dollar that is dragging the dirham down. The dollar clawed back some ground yesterday on the back of the latest rate cut, but its low-yielding status and lingering concern about the US economy limited its gains.

But economists remain optimistic, describing the resulting inflation as a temporary situation that will eventually subside.

"The Fed will continue to reduce rates and this will be mirrored in the UAE. The emphasis will shift from bank deposits to other assets such as equities and real estate as the appetite for saving diminishes," Dr Giyas Gokkent, head of research at the National Bank of Abu Dhabi, told Gulf News.

The Fed has already indicated that further cuts will take place in March, adding to the pressures in the UAE and elsewhere in the Gulf.